When cash gets tight, payroll tax deposits are often the first payment a small business delays. It can feel like a short-term loan from the government. The IRS does not see it that way, and the consequences can reach the owner personally, not just the business.
Why the IRS treats payroll taxes differently
Part of what you send the IRS each payroll is not your money. The income tax and the employee’s share of Social Security and Medicare you withhold from paychecks are called trust fund taxes: the IRS considers that you hold them in trust for your employees until you deposit them.
That is why unpaid payroll taxes are treated more seriously than most other tax debts.
The penalties add up quickly
Late deposits trigger a failure-to-deposit penalty, a percentage of the unpaid deposit:
| Deposit made | Penalty |
|---|---|
| 1 to 5 days late | 2% |
| 6 to 15 days late | 5% |
| More than 15 days late | 10% |
| More than 10 days after the first IRS notice, or after a demand for immediate payment | 15% |
Interest is added on top, and late-filed payroll returns can bring additional penalties.
When the owner becomes personally responsible
If trust fund taxes stay unpaid, the IRS can assess the Trust Fund Recovery Penalty against individuals, not only against the company. The penalty equals the full amount of the unpaid trust fund taxes.
It applies to anyone the IRS considers both:
- Responsible: someone with the duty and authority to collect and pay these taxes. That can include owners, officers, partners, and others who control which bills get paid.
- Willful: someone who knew, or should have known, the taxes were unpaid and did not pay them. Paying other bills, such as rent, suppliers, or wages, instead of the IRS is a common sign of willfulness.
Once the penalty is assessed, the IRS can pursue the person’s own assets through liens and levies, even if the business closes.
The letter you should never ignore
Before assessing this penalty, the IRS sends a letter proposing it. You generally have 60 days from the date of that letter to appeal. If you do nothing, the IRS assesses the penalty and sends a demand for payment. This is often the most important window to have the case reviewed by a professional.
What options may be available
Every case is different, but common paths include:
- Getting current first. The IRS generally expects ongoing deposits to be made on time before it agrees to resolve past balances.
- Payment plans for the business or for the individual, depending on the amount and the financial situation.
- Penalty relief when there is reasonable cause, or under the IRS first-time relief rules for businesses with a clean compliance history. Starting in 2026, the IRS is applying this relief automatically to certain quarterly payroll returns.
- Reviewing the responsibility determination, when the IRS names someone who did not actually control the payments.
Act before it escalates
Payroll tax problems rarely fix themselves, and the cost grows every quarter. If your business is behind on deposits or you received an IRS letter about payroll taxes, schedule a confidential consultation. As an Enrolled Agent, Nora Riano is authorized to represent taxpayers before the IRS and can review your situation and explain your options.